solvency 2 Flashcards
What is solvency 2?
principles based insurance regulatory system for capital level in EU
3 pillars of solvency 2
- Quantitative – calculate Solvency Capital Requirement (SCR) & Minimum Capital Requirement (MCR) – total balance sheet approach
- Supervisory activities - governance structure (4 functions & 3 conditions)
- Transparency – public disclosure of report (w/ pillars 1 & 2) given to regulator
Purpose of pillar 3 - transparency
insurers know their actions are public → improves insurer behavior + reduces regulatory intervention
Functions in pillar 2 – supervisory activities (4)
- Internal audit – report shortcomings in internal controls
- Actuarial - calculating technical provisions (SCR & MCR) using reasonable methods
- Risk management – perform OwnRisk-SelfAssessment (ORSA) to identity risks
- compliance – internal controls comply w/ laws → tell board if out of compliance
Conditions in pillar 2 – supervisory activities (4)
- fitness (qualified employees)
- proper (truthful employees)
- outsourcing key functions (independent employees)
- internal control (to follow laws/procedures)
What is included in ORSA (own risk self-assessment)?
- Amount of funds to ensure solvency (based on solvency 2 requirements & unique company risks)
- processes to manage risks
- Any deviation from standard formula? IF yes THEN could lead to capital add-on i.e. increase in SCR
IFRS liability parts that add up to equal total IFRS assets
- discounted best estimate of liability – technical provision 1 calculated by actuary
- risk margin – technical provision 2 calculated by actuary
- Solvency Capital Requirement (SCR) – (Minimum Capital Requirement (MCR) is a portion of SCR)
- Free surplus
SCR defined & criticism
- 99.5% VaR→pr(ruin) = 0.5% in 1 year
- Does not assume you need to hold enough capital in time between inception to settlement (only looks at beginning & end)
If total capital <( best estimate of liabilities + risk margin + SCR)
Regulatory intervention
If total capital < (best estimate of liabilities + risk margin + MCR)
Company not permitted to operate
Solvency II vs RBC (7)
- tailored w/ ORSA vs same formula for all companies
- discounting margin vs not discounted
- uses IFRS assets vs SAP assets
- principal based vs rule based
- inc cat, interest, operations risks vs not
- based on VaR model vs no model
- SCR & MCR action level vs CAL, RAL, ACL, MCL
SCR defined
SCR criticism
99.5% VaR–>pr(ruin)=0.5% in 1 year
does not assume you need to hold enough captial in time between incpetion & settlement (only looks at beginning and end)
